Annual Report2015 JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts for the year ended 31st January 2015

Transcription

1 Annual Report2015 JPMorgan Income & Growth Investment Trust plc Annual Report & Accounts for the year ended 31st January 2015

2 Features Contents 1 Financial Results Strategic Report 2 Chairman s Statement 4 Investment Managers Report 8 Financial Data 9 Financial Record 10 Ten Largest Investments 11 Portfolio Analysis 11 UK Direct Equity Analysis 12 List of Investments 14 Capital Structure of the Company 15 Business Review Governance 19 Board of Directors 21 Directors Report 23 Corporate Governance 29 Directors Remuneration Report 32 Statement of Directors Responsibilities 33 Independent Auditor s Report Financial Statements 36 Income Statement 37 Statement of Total Recognised Gains and Losses 37 Reconciliation of Movements in Shareholders Funds 38 Balance Sheet 39 Cash Flow Statement 40 Notes to the Financial Statements Shareholder Information 61 Notice of Annual General Meeting 64 Glossary of Terms and Definitions 69 Information about the Company Objectives The Company s investment objectives are to meet the final capital entitlement of the Income shareholders and to provide them with a regular quarterly income as well as to provide capital growth for Capital shareholders. Investment Policy In order to manage risk, the Company invests in a diversified portfolio, typically comprising 50 to 70 UK equities and a range of other assets. The investments are primarily UK equities, however, the Company has the flexibility to vary the allocation between UK equities and other assets in order to seek the best total returns. Benchmark The FTSE 350 Total Return Index. Capital Structure For details of the Company s capital structure, please refer to page 14. Life of the Company The Company has a fixed life, and will be wound up voluntarily on or around 30th November Management Company and Company Secretary The Company employs JPMorgan Funds Limited ( JPMF or the Manager ) as its Alternative Investment Fund Manager and Company Secretary. JPMF is approved by the Financial Conduct Authority and delegates the management of the Company s portfolio to JPMorgan Asset Management ( JPMAM ). FCA regulation of non-mainstream pooled investments The Company currently conducts its affairs so that the shares issued by JPMorgan Income & Growth Investment Trust plc can be recommended by Independent Financial Advisers to ordinary retail investors in accordance with the FCA s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The shares are excluded from the FCA s restrictions which apply to non-mainstream investment products because they are shares in an investment trust. AIC The Company is a member of the Association of Investment Companies. Website The Company s website, which can be found at includes useful information on the Company, such as daily prices, factsheets and current and historic half year and annual reports.

3 Financial Results Total returns +9.0% Unit net asset value total return 1 (2014: +15.2%) % (8.0p) Capital share net asset value total return 1 (2014: 3.3p) +4.8% Income share net asset value total return 1 (2014: +11.6%) +2.6% Unit share price total return (2014: +22.0%) 21.1% (11.3p) Capital share price total return (2014: +54.1% (14.3p)) +5.3% Income share price total return 3 (2014: +14.7%) +8.9% Shareholders Funds total return (2014: +15.8%) +7.3% FTSE 350 Total Return Index 2 (2014: +9.7%) The above are total returns and include dividends reinvested. Performance % JPMorgan Income & Growth unit return to shareholders JPMorgan Income & Growth unit return on net assets Benchmark A glossary of terms and definitions is provided on page64. 1 Source: J.P. Morgan. 2 Source: FTSE. 3 Source: Morningstar. Share price change plus dividends received. JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts

4 Strategic Report Chairman s Statement Your Company had another good year. Our long-term benchmark is the UK stock market, measured by the FTSE 350 Index. It delivered a total return of 7.3%, extending the gains since the nadir of markets in March Shareholder funds again beat the index, growing by 8.9%. As a split capital investment trust, we have dual objectives of delivering income and capital growth. The two aims are compatible when markets are rising. However, by keeping interest rates low, central bankers are making it increasingly difficult to source income without potentially distorting the search for capital growth. The Board continues to mitigate this by giving our investment managers the flexibility to capture income from assets other than UK equities. The resulting asset allocation is shown in the investment manager report. Over 70% of our shareholder funds are invested in UK equities; the other quarter is invested across multiple regions and assets. Total equity exposure is 85% of gross assets. Only one section of the portfolio (high yield bonds) detracted from our performance over the last year; all the other assets in the portfolio added to our returns. Our diversification into European equities, for example, delivered 11.5%: this is significantly better than the UK market s returns. The Company has maintained borrowing at 20 million. Half of this debt is at a fixed interest rate, so if central banks do start to raise rates before the end of the Company s life in 2016, we are substantially protected. Our having debt in a rising market also added to our returns, offsetting the investment management fees and the other costs of running the Company. All of these figures are shown on page 43 of the Accounts. Chairmen and investment managers invariably write that the outlook is particularly uncertain. I cannot remember a period in my career when the future was not clouded by numerous risks, or when we did not think that it was especially uncertain. Hindsight makes us think that the outlook was obvious. However, we are in a unusual position of facing the end of the Company s life in November 2016, which is only 18 months away. That short time period does expose us to the risk that markets react badly to any return to more conventional monetary policy, and that there is no time for markets to recover. We also face geopolitical risk in the Middle East and Russia, the possibility of chaos in UK politics, and further stresses in the Eurozone. Equally, if we take money out of markets, we may miss a further rally despite all these risks, which are well known by investors. The Board believes that our current asset allocation balances the interests of capital and income shareholders, and that we shall maintain this level of market exposure in the period leading up to our dissolution, unless extraordinary circumstances arise. Shareholders can then take their own view on the scale of these risks. We will not spring any surprises on you. 2 JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts 2015

5 A number of shareholders have written to ask the Board whether we intend to offer a roll-over vehicle for those of you who wish to remain invested in the market and who do not wish to crystallise a capital gain unnecessarily. It is too early for us to know whether there is sufficient appetite for such an option. We continue to investigate all possibilities with JPMorgan and our brokers; and we will update shareholders by this time next year. Our AGM will be held in May at our manager s offices near Blackfriars. We hope to see as many of you as possible. In the meantime, we will respond to any questions shareholders raise. Karl Sternberg Chairman 13th April 2015 JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts

6 Strategic Report continued Investment Managers Report Economic and Market Review Over the 12-month period ending 31st January 2015, global stock markets delivered strong returns. The FTSE World Index was up 17.2% in sterling terms. The UK stock market underperformed, but still delivered returns well ahead of inflation: the FTSE 350 index returned 7.3%. Global fixed income markets experienced increased volatility as a result of diverging monetary policies and economic growth but government bonds still performed well over the period. Other parts of the fixed income market, like high yield bonds, did not perform so well. James Elliot A major theme in the period was the end of asset purchases by the US Federal Reserve, and speculation over the timing of the first US interest rate rise. The Federal Reserve began tapering its $85 billion per month asset purchase programme in January The programme was eventually completed in October. The response of US and other developed stock markets was fairly muted, given that the winding down of quantitative easing (QE) had been well flagged and widely anticipated; and because the QE hat was passed to other countries. Whilst economic conditions in the US and UK continued to improve, Japan and the Eurozone suffered further weakness. The European Central Bank (ECB) and Bank of Japan (BoJ) undertook further stimulus measures in response. Katy Thorneycroft In order to prevent a deflationary spiral, the ECB cut its main refinancing rate to 0.05% in June. It attempted to boost the flow of credit by introducing a negative deposit rate and by extending cheap long-term funding to the banks. By the end of our reporting period, the ECB had responded to even weaker inflation data by announcing a new QE programme of EUR 60 billion a month, largely comprised of purchases of eurozone sovereign debt. The asset purchases are scheduled to begin in March and last until September Portfolio Review The Income and Growth portfolio is managed with the objectives of meeting the final capital entitlement of the Income shareholders, as well as providing them with a regular income, and of providing capital growth for the Capital shareholders. Any asset allocation or portfolio construction decisions that we make are judged on the needs of both the Income and Capital shareholders. Shareholders funds grew by 8.9%, which is ahead of the Company s benchmark return of 7.3%, as measured by the FTSE 350 index. Sarah Emly We began the financial year with a positive outlook for equities driven by improving global growth with quiescent inflation, accommodative monetary policy, and supportive valuations. During the past 12 months the allocation to UK equities has remained around 70% of the portfolio. We continued to diversify the portfolio in 2014 beyond UK equities by investing in other strategies offering exposure to European and global equities, corporate bonds and other securities offering an John Baker 4 JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts 2015

7 attractive yield. The allocations to the diversifying strategies remained broadly unchanged over the year. 1 mth 6 mths 1 yr 3 yrs pa 5 yrs pa Income & Growth Benchmark Source: Bloomberg, J. P. Morgan Asset Management. Fund is shareholders funds and benchmark is FTSE 350 Total Return Net. All the strategies delivered positive absolute returns during the review period. Their contribution to the total return is shown in the table below. Contributions to Total Returns as at 31st January 2015 Contribution to Performance % Benchmark total return (FTSE 350 Index) +7.3 UK Equities +0.7 JPMorgan Multi-Asset Income Fund +0.6 JPMorgan Europe Strategic Dividend Fund +0.3 JPMorgan Global High Yield Bond Fund 0.2 Gearing +2.2 Investment Manager contribution Management fee/other expenses 2.0 Other effects 2.0 Shareholders funds +8.9 Source: Xamin/JPMAM/Morningstar. All figures are on a total return basis. Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark index. UK Equity Portfolio Review The UK equity portfolio outperformed the Company s benchmark and as shown in the table above, contributed positively to the total return of the Trust. The portfolio modestly underperformed the positive returns of the UK equity market in the first half, before outperforming the market during the second half of the year. Our best performing stock over the year was Provident Financial, a financial services group which delivered a return of +69% over the 12 months. The company continued to deliver good results and double-digit dividend growth, whilst having an attractive dividend yield. Our long-standing overweight positions in two other JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts

8 Strategic Report continued Investment Managers Report continued premium dividend yielders, Imperial Tobacco and Direct Line Insurance Group, were also strong performers, returning +47% and +30% respectively. Their good dividend growth records and delivery of strong operating performance became more widely appreciated by investors. Our position in Ashtead, the international equipment rental business, delivered strong returns as the company benefited from strengthening structural growth trends, particularly in the US. By contrast, our holding in Barclays was unhelpful. Its share price fell over the year in response to ongoing concerns about potentially adverse regulatory issues, despite its cheap valuation. Our holding in Foxtons, the recently floated London estate agency business, also detracted from performance as the London housing market slowed. We sold this stock before it delivered a disappointing trading update and was demoted to the index of smaller companies. We introduced a holding in the life insurer Aviva during the year, as the ongoing restructuring and focus on cost reduction gave us more confidence about the growth prospects of this company. Their recently announced proposed takeover of Friends Life PLC will, if approved, accelerate the dividend growth of the enlarged group. We added to our existing position in Prudential, the global life insurer with a strong presence in Asia, during the year. We added to our position in the clothing retailer, Next, as the company stood to benefit from the improving economic outlook for the UK and the boost to consumer spending from the lower oil price. By contrast, we exited two of our utility stocks during the year, Drax and Centrica. There were increasing concerns over the prospects for Drax s biomass conversion programme, given the government s changing policy stance. We also sold our position in Centrica, the multi-utility, as its earnings prospects weakened and we viewed the increasing political and regulatory risks as being unfavourable. Centrica has subsequently cut its dividend by over 20%. JPM Multi-Asset Income Fund The fund returned +10.5% during the 12 month period. The fund was positioned with significant exposure to equity markets, at the upper end of its historical range. The biggest contributors to performance were the global equity and high yield allocations We reduced exposure to European peripheral debt and convertible bonds as the yield opportunities in these asset classes declined. We used the proceeds to increase European equity exposure to take advantage of more appealing dividend yields. JPM Global High Yield Bond Fund Over the past year the Fund returned +2.8%, so this position was a slight drag on overall performance of the Company after several years of excellent contribution. The asset class continues to deliver an attractive yield in a low-rate environment, while corporate fundamentals remain solid and default rates low. The fund benefits from its preference for the deeper and more liquid USD denominated market. 6 JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts 2015

9 JPM Europe Strategic Dividend Fund This holding was a positive contributor to overall returns, delivering 11.5% over the year. At the sector level, positive contributors to relative returns included stocks in the banks, real estate and diversified financials sectors. Outlook We expect the global economy to move into a mid-cycle phase, led by the US, with inflation and wages contained for the moment. While this raises the prospect of interest rate increases in the US, the growth backdrop in this region combined with monetary stimulus elsewhere in the world means we continue to be positive on prospects for equities, supporting our significant UK and European equity exposure in the Income & Growth portfolio. Loose monetary policy across the world, reinforced by further quantitative easing in Japan and Europe will also support bonds, whether government or corporate. Additionally, the fall in the oil price has increased uncertainty and we will look to take advantage of any opportunities that may arise. We continue to seek the most attractive dividend yields in Europe and the UK. Although some of the major UK equity dividend payers are likely to hold their dividends flat this year (such as the oil majors, BP and Royal Dutch Shell, and also GlaxoSmithKline), the dividend growth outlook from some other UK stocks is more encouraging. A number of companies, particularly some financial services companies and insurers, have recently announced good dividend growth and some of the more cash generative companies have also announced special dividends. However, the looming general election could deliver an inconclusive result and a period of constitutional and policy instability. James Elliot Katy Thorneycroft Sarah Emly John Baker Investment Managers 13th April 2015 JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts

10 Strategic Report continued Financial Data for the year ended 31st January st January 31st January % change Income shares: Net assets attributable ( 000) 65,954 65, Net asset value per share (p) Share price (p) Share price discount to net asset value per share (%) Capital shares: Net assets attributable ( 000) 5,187 2, Net asset value per share (p) Share price (p) Share price premium to net asset value per share (%) Units: Shareholders funds 71,141 67, Net asset value per unit (p) Share price (p) Share price discount to net asset value per unit (%) Revenue for the year: Gross revenue ( 000) 3,733 3, Net revenue attributable to income shareholders ( 000) 3,079 2, Return per Income share (p) Dividend per Income share (p) Gearing (%) Ongoing Charges (%) A glossary of terms and definitions is provided on page JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts 2015

11 Financial Record from 20th December 2006 (the launch date) to date 20th December 31st January 31st January 31st January 31st January 31st January 31st January 31st January 31st January Income shares Net assets ( 000) 64,747 66,894 39,010 47,777 54,012 52,909 61,173 65,591 65,954 Net asset value per share (p) Share price (p) Premium/(discount) (%) 1.1 (13.9) (11.8) (10.9) (16.2) (14.2) (12.7) (11.0) (11.1) Capital shares Net assets ( 000) 29,117 5,498 2,144 5,187 Net asset value per share (p) Share price (p) Premium (%) N/A N/A N/A N/A N/A Year ended 31st January Gross revenue ( 000) N/A 6,362 5,274 3,077 3,293 3,834 3,419 3,551 3,733 Revenue return attributable to Income shareholders ( 000) N/A 5,059 3,472 2,462 2,744 3,276 2,727 2,878 3,079 Total dividends declared ( 000) N/A 4,321 3,903 2,521 2,487 2,902 2,716 2,716 2,716 Revenue return per Income share (p) N/A Total dividends declared per Income share (p) N/A Special dividend declared per Income share (p) N/A 0.5 Gearing (%) N/A Ongoing Charges (%) N/A Rebased to 100 at 20th December 2006 Year ended 20th December 31st January Unit net asset value total return Unit price total return Income share net asset value total return Income share price total return Capital share net asset value return Capital share price return Benchmark return Covers the period from 20th December 2006 (the date the Company began investing) to 31st January A glossary of terms and definitions is provided on page 64. JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts

12 Strategic Report continued Ten Largest Investments at 31st January Valuation Valuation Company Sector 000 % % 1 JPMorgan Multi-Asset Income Fund Diversified Assets 15, , This fund aims to provide diversified income by investing in a global portfolio of fixed and floating rate debt, equity and equity-linked securities. JPMorgan Europe Strategic Dividend Fund Diversified Assets 5, , This open-ended investment fund s objective is to provide long-term returns by investing primarily in high yielding European equities. Royal Dutch Shell Oil & Gas 4, , Royal Dutch Shell is the UK s largest oil and petrochemicals company. HSBC Financials 3, , HSBC provides a variety of international banking and financial services, including retail and corporate banking. JPMorgan Global High Yield Bond Diversified Assets 3, , The fund s objective is a high total return by investing primarily in fixed-income securities (including below investment grade securities which may be unrated) of government and corporate issuers in developed countries. BP Oil & Gas 2, , BP is the UK s second largest oil and petrochemicals company. British American Tobacco 2 Consumer Goods 2, , British American Tobacco manufactures and sells cigarettes and other tobacco products, including cigars and roll-your-own tobacco. Vodafone Telecommunications 2, , Vodafone is Europe s largest mobile telecommunications company. GlaxoSmithKline Health Care 2, , GlaxoSmithKline is a research-based pharmaceutical company that develops and sells prescription and over-the-counter medicines. AstraZeneca 2 Health Care 2, , AstraZeneca is a research-based pharmaceutical company that develops and sells prescription and over-the-counter medicines. Total 45, Based on total investments of 90.3m (2014: 87.0m). 2 Not included in the ten largest investments at 31st January At 31st January 2014, the value of the ten largest investments amounted to 46.8m representing 53.8% of total investments. 10 JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts 2015

13 Portfolio Analysis At 31st January 2015 At 31st January 2014 Asset Breakdown % 1 % 1 UK Direct Equities Diversified Assets Bond Fund Total Based on total investments of 90.3m (2014: 87.0m). UK Direct Equity Analysis At 31st January 2015 At 31st January 2014 Portfolio 1 FTSE 350 Index 2 Portfolio 1 FTSE 350 Index 2 Sector Breakdown % % % % Financials Consumer Goods Oil & Gas Consumer Services Health Care Industrials Telecommunications Basic Materials Utilities Technology Total Based on total UK Direct Equities of 66.2m (2014: 62.3m). 2 Source: FTSE. JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts

14 Strategic Report continued List of Investments at 31st January 2015 Value Company 000 Financials Banks HSBC 3,899 Lloyds Banking 1,708 Barclays 1,500 7,107 Life Insurance Prudential 1,499 Aviva 1,292 Standard Life 739 Legal & General 724 Old Mutual 518 4,772 Financial Services Provident Financial 1,215 Schroders 1,060 Jupiter Fund Management 572 Henderson 515 3,362 Non-life Insurance Direct Line Insurance 934 Beazley Group 862 1,796 Real Estate Investment Trusts British Land 1,251 1,251 Total Financials 18,288 Consumer Goods Tobacco British American Tobacco 2,810 Imperial Tobacco 2,199 5,009 Household Goods & Home Construction Berkeley 944 Taylor Wimpey 613 Galliford 519 Persimmon 476 2,552 Value Company 000 Beverages SABMiller 1,283 1,283 Automobiles & Parts GKN Total Consumer Goods 9,656 Oil & Gas Oil & Gas Producers Royal Dutch Shell 4,787 BP 2,840 Total Oil & Gas 7,627 Consumer Services Media ITV 1,534 Reed Elsevier 878 WPP 760 Informa 464 3,636 General Retailers Next 926 WH Smith 667 Halfords 560 2,153 Travel & Leisure Compass 1,177 Go-Ahead 436 1,613 Total Consumer Services 7,402 Health Care Pharmaceuticals & Biotechnology GlaxoSmithKline 2,480 AstraZeneca 2,320 Shire 695 Total Health Care 5, JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts 2015

15 Value Company 000 Industrials Support Services Ashtead 1,004 Berendsen 793 Interserve 468 DCC 452 Diploma 373 3,090 Aerospace & Defense Senior 674 BAE Systems 620 1,294 Industrial Engineering Spirax-Sarco Engineering 571 Bodycote Total Industrials 5,356 Telecommunications Fixed Line Telecommunications BT 1,968 KCOM 649 2,617 Mobile Telecommunications Vodafone 2,580 2,580 Total Telecommunications 5,197 Value Company 000 Utilities Gas, Water & Multiutilities National Grid 1,602 1,602 Electricity Scottish & Southern Energy Total Utilities 2,269 Technology Software & Computer Services Micro Focus International 491 Total Technology 491 UK Direct Equities 66,212 Diversified Assets JPMorgan Multi-Asset Income Fund 15,149 JPMorgan Europe Strategic Dividend Fund 5,279 JPMorgan Global High Yield Bond 3,637 Total Diversified Assets 24,065 Total Investments 1 90,277 1 Total investments comprises 86,640,000 in equity shares, 3,637,000 in bonds. Basic Materials Mining Rio Tinto 1,965 BHP Billiton 831 Glencore Xstrata 536 3,332 Chemicals Elementis Forestry & Paper Mondi Total Basic Materials 4,431 JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts

16 Strategic Report continued Capital Structure of the Company Introduction The Company was launched in December 2006 as a split-capital investment trust with two classes of shares, Capital shares and Income shares which have different entitlements to participate in the earnings and capital of the Company. The Company s investment objectives are both to provide the Income shareholders with a regular quarterly income and to achieve the Net Asset Value (NAV) of the defined final capital entitlement of 103.4p of the Income shareholders, and thereafter to provide capital growth in the Company s NAV for the benefit of the Capital shareholders. It aims to enhance stock market yield and capital returns by the use of gearing and to beat the FTSE 350 share index. Around 40% of the capital can be invested outside UK equities in pursuit of these objectives. The Company has a fixed life which ends on 16th November At 31st January 2015, the Company s share capital comprised 61,747,803 Income shares of 1p each and 64,527,781 Capital shares of 1p each. Under accounting standards, the Income share class is classified in the accounts as a liability due to the rights attached to that share class. The Capital share class, which is the subordinate class of shares, is classified as equity. This means that the Balance Sheet of the Company will show zero net assets unless the assets increase to a level in excess of the final entitlement of the Income shares. (At the year end, the total assets of the Company amounted to 71,141,000 including the balance of revenue available for dividends amounting to 2,107,000). Net assets attributable to Capital shares amounted to 5,187,000 at the year end. Income shares Characteristics and Entitlements The Income shares offer a dividend yield and first call on capital up to a predetermined capital entitlement on winding up. Income shares will have a maximum capital entitlement of 103.4p per share on any winding-up of the Company. They are also entitled to any undistributed revenue available for dividend payments. Income shares are entitled to such dividends as the Directors may determine to distribute in respect of each financial period. Such dividends will take the form of quarterly dividends to be declared in February, May, August and November, and paid in March, June, September and December respectively. Revenue available for dividend payments At 31st January 2015, undistributed revenue amounted to 2,107,000 (before payment of the fourth quarterly dividend) and has been allocated in the accounts to the Income shares. Further details on the movement in the revenue available for dividend payments are given in note 15 on page 49. Voting Rights Each holder of Income shares present in person at a general meeting will have one vote on a show of hands and, on a poll, each holder present in person or by proxy will have one vote for each Income share held. Income and Capital shares rank pari passu with respect to voting rights. Capital shares Characteristics and Entitlements Generally by virtue of their effective gearing and their lack of yield, Capital shares have limited protection against adverse market movements and are therefore classed as high risk securities. Conversely, they are potentially attractive securities to investors seeking a geared exposure to the capital performance of investment markets. Capital shares are entitled to be paid an amount, on any winding up of the Company, representing all the surplus net assets after repaying the bank loans and any other obligations and meeting the final entitlement of the Income shares. The Capital shares have no entitlement to revenue available for dividends. Voting Rights Each holder of Capital shares present in person at a general meeting will have one vote on a show of hands and, on a poll, each holder present in person or by proxy will have one vote for each Capital share held. Income and Capital shares rank pari passu with respect to voting rights. Units Characteristics and Entitlements A Unit share comprises one Capital share and one Income share. On application to the Company s Registrar, these shares may be separated into Income shares and Capital shares. Unit shareholders have the same entitlements and voting rights as if they held separately the Income shares and Capital shares comprised in their Units. 14 JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts 2015

17 Business Review Investment Policies and Objectives The Company invests in a diversified portfolio of investments, typically comprising 50 to 70 UK equities and a range of other assets. J.P. Morgan Asset Management (UK) Limited ( JPMAM or the Manager ) has been appointed to actively manage the portfolio which was valued at 90.3 million as at 31st January 2015 of which 73.3% was invested in UK equities. The objectives are to meet the final capital entitlement of the Income shareholders and to provide them with a regular quarterly income as well as to provide capital growth for Capital shareholders Key Performance Indicators ( KPIs ) The Board uses a number of financial KPIs to monitor and assess the performance of the Company. The principal KPIs are: Performance against the benchmark index Performance Figures have been rebased to 100 at the time of the launch of the Company Investment Limits and Restrictions The Board has imposed a number of limits and restrictions on the Manager including: It will not invest more than 40% of the portfolio in non-uk equities (non-uk equities as at 31st January 2015: 26.7%). It will not invest more than 15% of the portfolio in any individual investment apart from collective investment vehicles (Largest investment as at 31st January 2015: 5.3%) /12/06 31/01/07 31/01/08 31/01/09 31/01/10 31/01/11 31/01/12 Source: Morningstar/FTSE. JPMorgan Income & Growth Unit price. JPMorgan Income & Growth net asset value per Unit. Benchmark. 31/01/13 31/01/14 31/01/15 It will not invest more than 15% of its gross assets in other UK listed investment companies (as at 31st January 2015: 0%). The Company will use derivatives (including options, futures and interest rate swaps) within conditions and limits set by the Board. Borrowings The Company has a three year 20 million revolving credit facility in place which is due to mature on 16th November 2016 and was fully drawn at 31st January The interest rate for half of the facility has been fixed to shield against the effects of rising interest rates. Although the Company has the power under its Articles to borrow up to an amount equal to 60% of its Net Asset Value at the time of the drawdown, the Directors have set this limit at 35% of Net Asset Value at the time of the drawdown (as at 31st January 2015: 27.1%). Performance Relative to Benchmark Figures have been rebased to 100 at the launch of the Company /12/06 31/01/07 31/01/08 31/01/09 31/01/10 31/01/11 31/01/12 Source: Morningstar. JPMorgan Income & Growth Unit price. JPMorgan Income & Growth net asset value per Unit. The Benchmark is represented by the grey dotted line. 31/01/13 31/01/14 31/01/15 Performance attribution The purpose of the performance attribution analysis is to assess how the Company achieved its performance relative JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts

18 Strategic Report continued Business Review continued to its benchmark index, i.e. to understand the impact on the Company s relative performance of the various components such as asset allocation and stock selection. The Board reviews a detailed attribution analysis schedule at every Board meeting. Details of the attribution analysis for the year ended 31st January 2015 are given in the Investment Managers Report on page 5. Share price discount to net asset value ( NAV ) per share The Board has a share repurchase policy which seeks to address imbalances in supply of and demand for the Company s shares within the market and thereby seek to manage the volatility and absolute level of the discount or premium to NAV per share at which the Company s shares trade. The Board reviews the level of discount or premium to NAV per share on a regular basis and did not feel the need to repurchase any shares during the year. In the year to 31st January 2015, Units in the Company s shares traded between a premium of 1.6% and a discount of 8.2%, the Income shares traded between a discount of 8.1% and 12.7% and the Capital shares traded at a range of extremely high premia, reflecting the low level of net assets attributable to that share class. As the NAV attributable to Capital shares rose the premium fell, with a minimum premium of 17.1% recorded in the year. Unit Premium (+)/Discount ( ) /12/06 31/01/07 31/01/08 30/01/09 29/01/10 31/01/11 Source: Datastream. JPMorgan Income & Growth Discount. 31/01/12 31/01/13 31/01/14 30/01/15 Ongoing Charges The ongoing charges represent the Company s management fee and all other operating expenses, excluding finance costs, expressed as a percentage of the average daily net assets attributable to income shareholders during the year. The ongoing charges for the year ended 31st January 2015 was 1.29% (2014: 1.30%). The Board reviews the ongoing charges of the Company regularly and on an annual basis compares its ongoing charges against other companies with similar investment objectives and policies. The charges for the year under review were considered reasonable and no further action was considered necessary. Capital structure of the Company The Company s capital structure is detailed on page 14. The Company has the authority to repurchase shares in the market for cancellation and issue shares. The Company has not issued or repurchased any Income shares or Capital shares during the year or since the end of the year. A resolution to renew the Company s issuance powers will be put to shareholders for approval at the Annual General Meeting. The full text of this resolution is set out in the Notice of Meeting on page 61. A resolution to renew the Company s authority to repurchase shares at a discount to NAV will be put to shareholders at the forthcoming Annual General Meeting. The full text of this resolution is set out in the Notice of Meeting on page 61. Principal Risks With the assistance of the Manager, the Board has drawn up a risk matrix, which identifies the key risks to the Company. These key risks fall broadly under the following categories: Investment and Strategy: An inappropriate investment strategy, for example asset allocation or the level of gearing, may lead to under-performance against the Company s benchmark index and peer companies. The Board manages these risks by diversification of investments through its investment restrictions and guidelines which are monitored and reported on by the Manager. JPMAM provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses. The Board monitors the implementation and results of the investment process with the Investment Managers, who attend all Board meetings, and reviews data that show statistical measures of the Company s investment exposure and risk profile. The 16 JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts 2015

19 Investment Managers employ the Company s gearing tactically, within a strategic range set by the Board. The Board holds a separate meeting devoted to strategy each year. Market: Market risk arises from uncertainty about the future prices of the Company s investments. It represents the potential loss the Company might suffer through holding investments in the face of negative market movements. The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by JPMAM. The Board monitors the implementation and results of the investment process with the Investment Managers. Accounting, Legal and Regulatory: Should the Company breach Section 1158 ( Section 1158 ) of the Corporation Tax Act 2010, it may lose investment trust status and as a consequence gains within the Company s portfolio would be subject to Capital Gains Tax. The Section 1158 qualification criteria are continually monitored by JPMAM and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 2006 and, as its shares are listed on the London Stock Exchange, the UKLA Listing Rules and Disclosure and Transparency Rules ( DTRs ) issued by the FCA. A breach of the Companies Act could result in the Company and/or the Directors being fined or the subject of criminal proceedings. A breach of the UKLA Listing Rules or DTRs may result in the Company s shares being suspended from listing which in turn would breach Section The Board relies on the services of its Company Secretary, JPMAM, and its professional advisers to ensure compliance with the Companies Act 2006 and the UKLA Listing Rules and DTRs. Corporate Governance and Shareholder Relations: The Board regularly reviews and considers corporate governance issues and the Company s Shareholder views and relations. Details of the Company s compliance with respect to Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance report on pages 23 to 28. Operational: Disruption to, or failure of the Manager s accounting, dealing or payments systems or the depositary s or the custodian s records may prevent accurate reporting and monitoring of the Company s financial position. On 1st July 2014, the Company appointed BNY Mellon & Depositary (UK) Limited to act as its depositary, responsible for overseeing the operation of the custodian, JPMorgan Chase Bank, N.A., and the Company s cash flow. Details of how the Board monitors the services provided by the Manager and its associates and the key elements designed to provide effective internal control are included within the Risk Management and Internal Control section of the Corporate Governance report on pages 26 and 27. Going concern: Pursuant to the Sharman Report, Boards are now advised to consider going concern as a potential risk, whether or not there is an apparent issue arising in relation thereto. Going concern is considered rigorously on an ongoing basis and the Board s statement on going concern is detailed on page 21. Financial: The financial risks faced by the Company include market risk (comprising interest rate risk and other price risk), liquidity risk and credit risk. Further details are disclosed in note 24 on pages 54 to 59. Structure of the Company JPMorgan Income & Growth Investment Trust plc is an investment trust company that has a premium listing on the London Stock Exchange. In seeking to achieve its objectives, the Company employs JPMF which, in turn, delegates portfolio management to JPMorgan Asset Management (UK) Limited ( JPMAM ), to actively manage the Company s assets. The Board has determined an investment policy and related guidelines and limits, as described below. It aims to outperform the FTSE 350 Total Return Index. The Company is subject to UK and European legislation and regulations including UK company law, Financial Reporting Standards, the UKLA Listing, Prospectus, Disclosure and Transparency Rules, taxation law and the Company s own Articles of Association. The Company is an investment company within the meaning of Section 833 of the Companies Act 2006 and has been approved by HM Revenue & Customs as an investment trust (for the purposes of Sections 1158 and 1159 of the Corporation Tax Act 2010) for the year ended 31st January 2014 and future years. The Directors have no reason to believe that approval will not continue to be obtained. The Company is not a close company for taxation purposes. JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts

20 Strategic Report continued Business Review continued The Alternative Investment Fund Managers Directive ( AIFMD ) JPMF has been appointed as the Company s alternative investment fund manager ( AIFM ). JPMF has been approved as an AIFM by the Financial Conduct Authority ( FCA ). For the purposes of the AIFMD the Company is an alternative investment fund ( AIF ). The Company entered into a new investment management agreement with JPMF on 1st July JPMF has delegated responsibility for the day to day management of the Company s portfolio to JPMAM. JPMF is required to ensure that a depositary is appointed to the Company. The Company therefore has appointed BNY Mellon Trust and Depositary (UK) Limited ( BNY ) as its depositary. BNY has delegated its safekeeping function to the custodian, JPMorgan Chase Bank, N.A. BNY remains responsible for the oversight of the custody of the Company s assets and for monitoring its cash flows. The AIFMD requires certain information to be made available to investors in AIFs before they invest and requires that material changes to this information be disclosed in the annual report of each AIF. An Investor Disclosure Document, which sets out information on the Company s investment strategy and policies, leverage, risk, liquidity, administration, management, fees, conflicts of interest and other shareholder information is available on the Company s website at There have been no material changes (other than those reflected in these financial statements) to this information requiring disclosure. Any information requiring immediate disclosure pursuant to the AIFMD will be disclosed to the London Stock Exchange through a primary information provider. As an authorised AIFM, JPMF will make the requisite disclosures on remuneration levels and polices to the FCA at the appropriate time. Board Diversity When recruiting a new Director, the Board s policy is to appoint individuals on merit. Diversity is important in bringing an appropriate range of skills and experience to the Board. At 31st January 2015, there were four male Directors and one female Director on the Board. day to day activities are carried out by third parties. There are therefore no disclosures to be made in respect of employees. The Board notes the JPMAM policy statements in respect of Social, Community and Environmental and Human Rights issues, as highlighted in italics: Social, Environmental and Human Rights JPMAM believes that companies should act in a socially responsible manner. Although our priority at all times is the best economic interests of our clients, we recognise that, increasingly, non-financial issues such as social and environmental factors have the potential to impact the share price, as well as the reputation of companies. Specialists within JPMAM s environmental, social and governance ( ESG ) team are tasked with assessing how companies deal with and report on social and environmental risks and issues specific to their industry. JPMAM is also a signatory to the United Nations Principles of Responsible Investment, which commits participants to six principles, with the aim of incorporating ESG criteria into their processes when making stock selection decisions and promoting ESG disclosure. Our detailed approach to how we implement the principles is available on request. Greenhouse Gas Emissions The Company itself has no premises, consumes no electricity, gas or diesel fuel and consequently does not have a measurable carbon footprint. The Company s manager, JPMAM, is a signatory to the Carbon Disclosure Project and JPMorgan Chase is a signatory to the Equator Principles on managing social and environmental risk in project finance. Future Developments The future development of the Company depends on the success of the Company s investment strategy in the light of its capital structure, fixed life and the global economic and market developments. The Investment Managers discuss the outlook in their report on page 7. By order of the Board Divya Amin, for and on behalf of JPMorgan Funds Limited, Secretary 13th April 2015 Employees, Social, Community and Human Rights Issues The Company has a management contract with JPMAM. it has no employees and all of its Directors are non-executive. The 18 JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts 2015

21 Governance Board of Directors Karl Sternberg (Chairman of the Board and Nomination Committee) A Director since Last reappointed to the Board: Current remuneration: 30,000. He is a Director of Friends Life Group, Lowland Investment Company, Monks Investment Trust and Railway Pension Investments. He is formerly the Chief Investment officer of Deutsche Asset Management Ltd and he was the Chief Executive of Oxford Investment partnership. He is also a Fellow of St Catherine s College Oxford. Connections with Manager: None. Shared directorships with other Directors: None. Current shareholding in Company: 6,825 Capital shares, 23,000 Income shares and 3,479 units. Nicholas Craig Harvey (Chairman of the Audit Committee) A Director since Last reappointed to the Board: Current remuneration: 24,500. He is currently a Director of Lainston Investment Services Limited. He was formerly a Director of Hambros Bank plc. Connections with Manager: None. Shared directorships with other Directors: None. Current shareholding in Company: 13,310 Capital shares and 4,760 units. Jane Tozer OBE A Director since Last reappointed to the Board: Current remuneration: 22,000. Jane worked for IBM in technical and marketing roles, before becoming CEO of a software company. She is currently the Senior Independent Director of F&C Global Smaller Companies plc, and a non-executive director of StatPro Group plc, Citizens Advice Service in Three Rivers Ltd, Asthma UK and the Information Technologists Company Charity. She is also co-founder of the Information and TMT Non-Executives Association and a member of the Advisory Board of Warwick University Business School. Connections with Manager: None. Shared directorships with other Directors: None. Current shareholding in Company: 44,592 Capital shares, 61,063 Income shares and 21,869 units. JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts

22 Governance continued Board of Directors continued David Watts A Director since Last reappointed to the Board: Current remuneration: 22,000. He was formerly the joint Chief Executive and Chief Investment Officer of Gartmore Investment Management Limited. He is a Director of Lord Wandsworth College Trust and Stern Farms Limited. He was previously a Director of Martin Currie Investment Management Limited. He was formerly Chairman of the Investment Committee of Merchant Navy Ratings Pension Fund Trustees Limited. Connections with Manager: None. Shared directorships with other Directors: None. Current shareholding in Company: 251,507 Income shares. Ian Scott-Gall A Director since Last reappointed to the Board: Current remuneration: 22,000. Ian, a Chartered Accountant and former CEO has had over 24 years public company experience as a CEO and a Finance Director with Vislink plc and Blick plc. He was formerly a Non-Executive Director of Control Instruments Group Ltd, listed on the Johannesburg stock exchange and a Director of Framlington Innovative Growth Trust Plc. Connections with Manager: None. Shared directorships with other Directors: None. Current shareholding in Company: 20,000 Capital shares and 26,200 Income shares. All Directors are members of the Audit and Nomination Committees and are considered independent of the Manager. 20 JPMorgan Income & Growth Investment Trust plc. Annual Report & Accounts 2015